The left is pushing hard to get college loan debt canceled up to $50,000. The Biden administration has been talking about relief to the tune of $10,000, but he has so far refused the petitions of his left flank. And yet, this president has not shown any capacity to resist pressure from his party’s progressive wing on other matters.
Whatever the amount of student loan debt forgiveness this administration settles on, this initiative is no small measure of how the Democratic Party has left its working-class roots behind and become the party of the elite.
It should be noted upfront that, from an economic standpoint, debts cannot be canceled. They can only be transferred. If student debt goes down by $50,000 per student, courtesy of the federal government, then the national debt goes up by $50,000 per student. (Students might also want to note that the IRS regards a forgiven debt as taxable income, which is due and payable in full on April 15th of the following year.)
But households headed by a college graduate in this country have a median annual income of about $108,000. Households headed by high school graduates have a median annual income of about $48,000, less than half as much. College graduates, over a lifetime, earn on average more than $1 million more than high school graduates.
In other words, while some people go to college for the sheer joy of learning, most do so to enhance their future incomes. They borrow to invest in their own human capital. Progressives think those investments should come at no cost to the beneficiaries of those investments.
But no progressive is proposing that if a high school graduate borrows $50,000 to finance a truck that will allow him to increase his future income, the federal government should take over that loan. People who make a living, even a good one, driving a truck don’t get much attention from progressives these days.
Why not? Shouldn’t government help those who most need the help, not those who need it least thanks to their much higher earning potential? And since there are many more households headed by high school graduates than by college graduates, the cost of servicing and paying down that student debt would be shifted from higher-income households to lower-income households, an idea that would have horrified FDR, Lyndon Johnson, or Hubert Humphrey.
Of course, a large part of the problem is that the cost of a college education, unlike the cost of a truck, has spiraled out of control. When I graduated from college, way back when, it cost $1,100 a semester or $2,200 a year. In today’s dollars, that would be slightly less than $18,000 a year. But tuition at that very well-endowed university today is nearly $64,000 annually (including housing). In other words, it costs more than 3.5 times as much, in constant dollars, to go there today.
Why? Well, it’s economics 101 that, if the price of a commodity increases year after year over the rate of inflation when there is no constraint on supply, then a cartel must be in operation. (Economically speaking, a college education is just a commodity, no different than pork bellies or steel pipe.)
Colleges are not subject to antitrust laws, and accrediting organizations act as the cartel enforcer, making competition by means of price very difficult. Ever-expanding government grants and aid programs make it possible for colleges to raise tuition with less resistance from the customers (i.e., students and their families). Every effort by the federal and state governments to make college more affordable has, therefore, had the perverse effect of making college ever more expensive. Canceling the debt of students up to $50,000 would exacerbate this ratchet effect.
Colleges don’t have to cost more every year. For example, since former Indiana governor Mitch Daniels, head of the Office of Management and Budget under George W. Bush, became President of Purdue University in 2013, tuition rates have been frozen despite the 13.4 percent increase in inflation since 2013.
Give colleges incentives to keep down costs and they will do so. Right now, the incentive is to increase tuition rates. And progressives want more of the same.